60% of S&P 500 In Bear Market: What Happens Now?

A broad-based decline in the S&P 500 Index (SPX) is putting 2018 on track to be the worst year for the U.S. stock market since the 2008 financial crisis, and yet more plunges may be ahead. "I'm pretty sure this is a bear market," says billionaire investment manager Jeffrey Gundlach, founder of DoubleLine Capital LP, as quoted by CNBC. If the economy slips into recession, as some experts forecast, the situation is bound to get uglier.

The list below indicates how wide and deep the market's recent drop has been. Some 60%, or 300 of the stocks in the S&P 500, are now in a bear market, which typically is defined as a decline of 20% or more from recent highs.

Significance For Investors

Calling the standard definition of a bear market as a 20% decline "arbitrary," Gundlach nonetheless sees other developments that indicate that one has arrived. "How you lead into it, how it develops, and how the sentiment changes. I think we've had pretty much all of the variables that characterize a bear market," he said.

James Bianco, president of Bianco Research, is concerned that policy missteps by the Federal Reserve may be a recessionary trigger. "The markets are worried that two rate hikes next year may be too many," he said, according to another CNBC report. "They have to be very, very careful that they don't wind up breaking something like they've done in the past with monetary policy being too tight," he added.

The Fed's announcement of a rate hike on Dec. 19 sparked a stock market sell-off. In addition to raising the short term federal funds rate, the Fed is reducing its massive holdings of bonds, which have pushed interest rates to historic lows, thereby stimulating the economy and propping up the prices of financial assets. The reversal of this policy, widely called quantitative easing (QE), may create serious headwinds for the economy and the market in 2019, Bianco warned.

With the U.S. federal budget deficit soaring, those headwinds may be particularly brisk. The Fed is projected to let $271 billion of U.S. government bonds, currently on its balance sheet, mature in 2019 without reinvesting the proceeds. Meanwhile, the U.S. federal government is forecast to issue new bonds worth about $856 billion in 2019, per estimates by Societe Generale cited by the Financial Times.

If the S&P 500 index simply stays flat until the end of 2018, this would be the worst month for the S&P 500 since February 2009, the last full month of the previous bear market, the FT reports. The 6.2% year to date decline in the S&P 500 puts 2018 on track to be the worst year since the financial crisis year of 2008, when it plummeted by 38.5%.

Looking Ahead

Given all the negatives that are piling up, many investors may be preparing for the worst. Nonetheless, some observers remain bullish. "You don't see recessions when you see global earnings still growing," is the view of Ryan Detrick, senior market strategist at LPL Financial, per CNBC.

Tom Lee, head of research at Fundstrat Global Advisors, has been on a record as a super-bull who believes that market still has years of upside in it. He told CNBC that an economic downturn "is not even close," and that "it's just a transition year." He added, "The bull market is reaching its mid-life."

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